On the economics of audit partner tenure and rotation : evidence from PCAOB data

We provide the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. Our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to exhibit audit quality effects. In particular, we find that low quality audits give rise to early engagement partner rotations and in this sense have (career) consequences for partners

Determinants and career consequences of early audit partner rotations

We examine how often and why some audit partners rotate off client engagements before the end of the maximum five-year cycle period. Specifically, we investigate whether audit quality issues play a role for engagement partners and clients to separate prematurely. For a sample of about 4,000 within-audit firm partner rotations for Big 6 clients over the 2008 to 2014 period, we find that client characteristics such as financial leverage or performance have little explanatory power. In contrast, severe audit quality issues such as financial restatements or PCAOB inspection findings are associated with early partner rotations. These associations are more pronounced for early rotations that are not explained by scheduled retirements, promotions, or temporary leaves as well as for large clients and when partners are less experienced. We also find that female partners have a higher likelihood of early rotation for audit quality reasons. Early rotations have career consequences. Partners are assigned to fewer SEC issuer clients, manage fewer audit hours, receive lower partner ratings, and are more likely to be internally inspected after being rotated early. Our results suggest that audit quality concerns are an important factor for early partner rotations with ensuing negative career consequences for partners’ client assignments and management responsibilities